Nintendo (NASDAQOTH:NTDOY) had a good run, but its time as a device maker might soon run out.
The company took the video game crown from Atari in the mid-1980s and remained a player through the last generation of console sales, when its Wii moved over 100 million units. That kept pace with Sony's (NYSE:SNE) PlayStation 3 and Microsoft's (NASDAQ:MSFT) Xbox 360, giving the company some hope it could compete by offering family friendly devices.
The 2012's launch of the Wii U crushed that notion, however, failing to repeat its predecessor's success even while being released a year before Sony and Microsoft's next-generation consoles. That leaves Nintendo's sole device strength in its handheld 3DS gaming system -- a product category quickly being made irrelevant by smartphones and tablets.
Nintendo is not likely to leave device-making easily or quietly, but it should -- the Wii U is a failure and the 3DS is a relic whose time is not likely to come again.
The Wii U's slow flop
Though the WiiU was introduced about 13 months before the Xbox One and PS4, it has sold less than both its rivals. In its third-quarter earnings report, Nintendo said the new console had moved 9.2 million units to date.
That's less than half the 20 million PS4s PCMag.com last week estimated Sony has sold and a bit behind the 10 million Xbox Ones Microsoft is believed to have moved. While Microsoft has only slightly topped Nintendo's sales total, it has done so in less than half the time. Xbox One also gained momentum after its price was cut, first in June 2014 to $399 when the Kinect motion sensor was unbundled from the console, and later during the holidays to $349.
The Wii U hasn't quite died because Nintendo's proprietary titles, including Mario Kart, Super Smash Bros., and The Legend of Zelda, keep customers trickling in, but it should be killed.
Nintendo would be far better off solely making games for the PS4 and Xbox One. That might not fit with the company's vision for itself, but it's a reality the company ultimately must accept.
The future of handheld gaming
For more than 20 years, Nintendo has done a brisk business in handheld gaming systems, usually as the dominant player. Since the Game Boy was released in 1989 through the current 3DS models, handheld devices have been a major part of Nintendo's success.
Unfortunately, phones and tablets basically eliminate the need for a dedicated mobile gaming system.
"The number of games downloaded to smartphones and tablets worldwide will nearly double to more than 60 billion games between 2014 and 2018," according to Lewis Ward, IDC's research director for gaming. "In this context, it will become increasingly difficult for the major handheld game console providers to compete effectively. The market as a whole will grow rapidly, though, and swing dramatically in the direction of Asia/Pacific and Android-based devices in particular by 2018."
It will be a slow death, but the trend has already started: Sales of Nintendo handhelds declined to 5.3 million in the last quarter of 2014 from 5.7 million in the same period of 2013. It's hard to picture those numbers changing as smartphone and tablet penetration grows.
I once bought my now 11-year-old son a 3DS for game play. When it broke after a couple of years I felt no need to replace it. Since buying the 3DS he had acquired an Amazon.com Kindle, which has the advantage of Internet connectivity and being able to play videos, as well as one of my old nonactivated Apple iPhones to play games and shoot pictures and videos.
He wanted a new 3DS, but the purchase made no sense for me; not only did the device cost over $100, but games also cost much more than on mobile platforms.
The 3DS is a great dedicated game device, but it's hard to justify the expense when tablets that can be bought for under $100 give users access to countless free and cheap high-quality games.
Just let it go
Nintendo has a future, it's just not in the device business.
The success of the initial Wii was an anomaly driven by how innovative that console was at the time. It's unreasonable to expect Nintendo to continue to out-innovate Sony and Microsoft, and Wii U proved it couldn't.
3DS is a sadder story given that the company has owned handheld gaming for such an extended period of time. Unfortunately, Nintendo basically owns the saddle market at the dawn of the automobile era. Handheld gaming on a device built solely for that purpose has become a luxury that a declining number of customers are likely to indulge.
Its time for Nintendo to leave the device market and focus on bringing its incredibly valuable gaming franchises to the widest audiences possible. Every month it delays doing that lessens the value of those properties, so the company must act or it risk depreciating its assets by confining them to a comparably tiny user base.
Daniel Kline owns shares of Apple and Microsoft. He has never played Wii. The Motley Fool recommends Amazon.com and Apple. The Motley Fool owns shares of Amazon.com and Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.